Dollarama Inc. (DOL) Earnings Call Transcript

Good morning, and welcome to Dollarama's Second Quarter Fiscal 2027 Results Conference Call. On today's call are Neil Rossy, President and CEO; and Patrick Bui, CFO. They will begin with brief remarks followed by a Q&A with financial analysts. Before we begin, please note that today's remarks may contain forward-looking statements about Dollarama's current and future plans, expectations, intentions, results or any other future events or developments. Forward-looking statements are based on information currently available to management and on reasonable estimates and assumptions made by management. Many factors could cause actual results, future events or developments to differ materially from those expressed or implied. You are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements represent management's expectations as at September 16, 2026. Except as may be required by law, Dollarama has no intention and undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You are invited to consult the cautionary statement on forward-looking statements in Dollarama's management's discussion and analysis dated September 16, 2026. All forward-looking statements on today's call are expressly qualified by this cautionary statement. In addition, Dollarama may refer to certain non-GAAP and other financial measures during the call. Please consult the non-GAAP and other financial measures section of Dollarama's MD&A dated September 16, 2026, for definitions, reconciliations with appropriate GAAP measures and other information. The disclosure documents related to this call are available in the Investor Relations section of dollarama.com and on SEDAR+. I will now turn the call over to Neil Rossy.

Thank you, Shannon. Good morning, everyone, and thank you for joining us. We delivered a strong second quarter and first half of fiscal 2027. Two things stand out, the continued strength of our value proposition and the execution of our teams across markets. At a time when consumers are making careful spending decisions, customers are counting on Dollarama for dependable value. Our brand promise continues to resonate across a broad customer base, reinforcing our relevance as a destination for everyday and seasonal goods. We are also moving our strategic priorities forward with discipline. We are driving profitable growth in Canada and in Central and South America, thoughtfully building our presence in Mexico and gaining momentum on our transformation road map in Australia. In Canada, despite a cautious consumer and continued pressure on household budgets, customers turned to Dollarama for their everyday needs during the second quarter. Same-store sales were strong, supported by an increase in customer traffic and basket growth, bringing our SSS year-to-date above our expectations for the first half of the year. Demand for consumables and general merchandise was sustained, while demand for seasonal products remained stable year-over-year. This performance reflects the strength of our merchandising approach. We continue to carefully manage our assortment across our established product categories and fix price points to deliver compelling relative value. It also speaks to the proximity and convenience we provide through our growing national network of well-located stores. We opened 15 net new stores across Canada during the quarter. This brought year-to-date net new openings to 43 and our total Canadian store count to 1,734 stores. Given our strong pace of openings through the first half and our pipeline for the balance of the year, we have increased our fiscal 2027 guidance to between 65 and 75 net new stores, up from the previous range of 60 to 70. Construction of our future logistics hub in Western Canada also progressed on plan. The hub is expected to be fully operational by the end of calendar 2027, enabling us to move to a distribution model in Canada in the near term. Turning to Latin America. Dollarcity delivered another solid performance in the second quarter and first half, generating strong same-store sales and store network growth. During the second quarter, Dollarcity opened 19 net new stores across our 4 Central and South American markets. This brought total store count in the region to 760 locations. In mid-August, subsequent to quarter end, the earthquake in Colombia temporarily affected a limited number of Dollarcity stores. I want to recognize the Dollarcity team for responding with care and urgency to support colleagues while restoring affected locations. Operations have since largely returned to normal and the financial impact is expected to be minimal. Turning to Mexico. We opened 10 stores during the second quarter, bringing the total count in the country to 21 by quarter end. The ramp-up of operations and network growth in Mexico remains on plan as the team continues to build density in the Guadalajara region. We also continue to be pleased with the initial customer response to our value and convenience proposition. In Australia, our multiyear transformation road map gained momentum during the quarter, supported by the team's continued execution of our fiscal 2027 initiatives. We renovated 25 stores during the quarter, up from 13 in Q1, improving store layout and navigation while allowing for greater SKU density. We also opened 4 net new stores on top of the 8 net new stores opened in the first quarter. We remain on track to renovate between 60 and 80 stores and open between 15 and 25 net new stores in fiscal 2027. Halfway through the year, we now have 60 stores operating with the Dollarama layout in fixtures, up from 28 at the end of Q1 out of a total of 414 locations nationally. It is encouraging to see the store transformations gradually taking shape as we work diligently in parallel to introduce Dollarama sourced products. On that front, the first Dollarama sourced import products started to reach shelves across the store network during the second quarter, and we expect that rollout to continue. While the number of new products currently available is too limited to provide a meaningful read on customer response, we are confident that our import assortment will be highly attractive once we have greater density. As a reminder, the product transition will remain gradual and disciplined. The team is working SKU by SKU to introduce more compelling value while aligning the required logistics support. We aim to have about half of our import products transitioned by fiscal year-end. This work will continue into fiscal 2028. Looking more broadly, we continue to operate in an uncertain environment. In Canada, economic conditions remain challenging, continued trade tensions and elevated living costs are pressuring consumers and weighing on the economic outlook. In this context, we expect consumers to remain thoughtful about their spending while continuing to seek value. For our business, the direct tariff impact comes from Canadian counter tariffs on a portion of the goods we purchased from the U.S. As discussed during the last round of counter tariffs over a year ago, we have the agility to navigate these measures and their financial impact remains manageable. Geopolitical conflict also continues to create cost pressures across global supply chains. The adaptability of our business model has enabled us to mitigate these in Q2, and we are actively working to manage potential impacts through the second half of the year. In this evolving environment, we will continue to make disciplined choices across sourcing, merchandising and operations. We will also stay true to our price follower philosophy to protect relative value for consumers through our product offering and within our fixed price points. Across our markets, our teams remain focused on earning every customer visit with strong value, convenient locations, compelling assortment and a consistent shopping experience. With that, I'll pass it over to Patrick.

Thank you, Neil, and good morning, everyone. We delivered strong financial and operating results in the second quarter, supported by sustained customer demand in Canada and Latin America and disciplined execution in Australia. We also continue to advance our growth ambitions while returning excess cash to shareholders. Starting with consolidated results, let me first highlight one point of comparability. Q2 of fiscal 2027 includes 3 full months of Australian results compared with only 13 days in the corresponding period of the prior fiscal year. In that context, consolidated sales for the second quarter of fiscal 2027 increased by 17.6% to more than $2 billion. The increase reflects network and same-store sales growth in Canada as well as the sales contribution from Australia. EBITDA increased 11%, coming in at $653 million for Q2, representing an EBITDA margin of 32.2%. Net earnings totaled $349.3 million, while diluted EPS increased 11.2%, reaching $1.29. This is compared to diluted EPS of $1.16 last year. Turning to our Canadian segment. Same-store sales increased by 5.4% over and above 4.9% growth last year. While consumer confidence remained weak, customers continue to turn to Dollarama for everyday value. Based on our first half performance and current outlook, we are increasing our fiscal 2027 same-store sales guidance range to between 4% and 4.5%, up from our previous range of 3% to 4%. Our updated guidance reflects a prudent view of the balance of the year. While our performance demonstrates the enduring relevance of our value proposition, we remain mindful that sustained pressure on household budgets and the uncertainty created by the current trade environment can affect consumer sentiment and overall spending. Still in Canada, gross margin came in at 45.7% of sales compared to 45.6% in the second quarter of fiscal 2026. The year-over-year increase primarily reflects the positive impact of scaling. Supply chain pressures, including the impact of higher oil prices on raw material and transportation costs were effectively managed in Q2. However, given the lag before these costs flow through our P&L, we expect their impact to become more pronounced as of Q3. We are confident we can mitigate a significant portion of these pressures through the second half of the year by leveraging the tools at our disposal while protecting relative value for customers. As a result and supported by our strong first half performance, we are maintaining our full year Canadian segment gross margin guidance of 45.0% to 45.5% despite anticipating higher costs for the balance of the year. SG&A for the Canadian segment was 13.8% of sales in Q2, in line with the prior year. Accordingly, our full year SG&A guidance remains unchanged at between 14.1% and 14.6% of sales. Scaling is expected to continue providing some leverage to help offset the higher store labor and operating costs. Turning to Dollarcity. Our share of their net earnings increased by 30.3% to CAD 49.9 million for Q2. This reflects a 39.7% year-over-year increase in our 60% share of net earnings from Dollarcity's Central and South American operations, partially offset by a CAD 5.7 million loss, representing our 80% share of the net loss related to the Mexico ramp-up. These losses remain in line with our expectations. Subsequent to quarter end, Dollarcity declared a cash dividend of USD 125 million, its second dividend this fiscal year. Our share amounts to USD 75.1 million. Once again, a portion of these proceeds is being used to fund our USD 38 million share of the net capital contribution towards expansion activities in Mexico. Both the dividend and the capital injection will be recorded in the third quarter of fiscal 2027. Turning to Australia. The transformation initiatives outlined by Neil are progressing according to plan. Our full year expectations for both transformation-related costs and segment earnings performance remain unchanged. As previously discussed, the ongoing transition to lower-priced merchandise is expected to continue weighing on sales in fiscal 2027 with the impact expected to be more pronounced through the second half of the year as the pace increases. We view this as a rebasing of sales, resetting the merchandising mix and price point structure, which are key elements of our proven value retail model will create near-term pressure. However, this transition is necessary to strengthen the value proposition and position the business for improved performance over time and for the long term. Turning to capital allocation. We continue to return excess cash to shareholders through share repurchases and a quarterly dividend. During the quarter, we repurchased more than 1.5 million common shares for cancellation under our normal course issuer bid, which was renewed in July for a total consideration of $300.4 million. We also announced today that the Board approved a quarterly cash dividend of $0.12 per share. As we enter the second half of the fiscal year, our priorities remain unchanged, and our plans are all on track. Our teams are focused on execution across each of our markets, serving customers with value and convenience and allocating capital in support of long-term value creation. We also recognize that the environment remains challenging for consumers and that trade tensions and geopolitical uncertainty persist. Against this backdrop, our value proposition remains highly relevant while our business model provides flexibility and tools to help manage some of the external pressures. We are proud that Dollarama is a trusted destination for consumers seeking compelling value, convenience and a broad assortment of everyday products. Our focus is continuing to deliver on that brand promise. With that, I'll now turn the call back to the operator for the Q&A.

[Operator Instructions] Our first question is from Irene Nattel with RBC Capital Markets.

Great quarter and stable momentum, which brings me to my question, which is if we look at the full year guide on same-store sales, it implies a quite reasonable deceleration in the back half of the year, looks -- takes you below 4% on same-store sales and particularly considering last year's Q4. So wondering what you're actually seeing kind of at a more granular consumer demand level? And is there really that much more caution in what you're seeing?

Yes. Thanks for your question, Irene. So just with respect to same-store sales, I think, first of all, we're pleased with the strong SSS of 5.4% in the quarter. We saw consistent strength throughout the quarter, including as we exited Q2 with clearly traffic remaining strong. So when it comes to guidance, I would say, on the one hand, our strong performance in the first half supports the positive revision to the full year outlook. But on the other hand, I think it's important to remain prudent for the balance of the year, given the ongoing uncertainties in the macro environment we all know about, whether that's higher oil prices and/or trade headlines. But overall, I think we're encouraged by the continued momentum reflected in our Q2 results.

Our next question comes from the line of Brian Morrison with TD Cowen.

Neil and/or Patrick, I get a lot of questions on inflation recently. And I wonder where this most benefits you? Is it accelerating trade down? Where it most impacts you? Is it higher fuel prices? And how this nets out positive and negative and whether this moves forward your view of the potential for a higher price point since it's been about 5 years since the introduction of a $5 price point.

Brian, thank you for the question. So the -- during difficult times, the consumer has less money to spend. It's that simple. By the same token during difficult times, the consumer trades down and that can benefit Dollarama. It's very hard to tell how much trading down there is, how much consumer reduction in noncore spending there is. At the end of the day, the true and only facts we have are our results. And so I think it's our job to continue to stay focused on being the best relative value that we can be in our category of goods and to make the shopping experience as pleasant as possible and to have as many convenient locations as we can across each of our markets, and that's our job. With respect to the $6 price point, as a reminder, our fixed price point strategy is a core element of our business model, and we would only introduce a higher price point if warranted. The key trigger would be cost inflation reaching a level where we can no longer sustainably support the current $5 max price point. However, based on what we're seeing today, we don't believe that an additional price point is necessary. And if the business continues to perform at a high level under our current pricing strategy, we will do what we've always done, which is to push off any additional price points as long as we can.

Our next question is from Chris Li with Desjardins.

Just wondering what are you seeing on spending on products that are more discretionary in nature at Dollarama? I think you mentioned seasonal was stable. I'm not sure if that's related to consumer being a bit more cautious? Or was it weather? Yes, just overall, just spending on more discretionary products.

Yes. Thanks for the question, Chris. I think what we've seen this quarter is really nothing more than a continuation of the trends that we've seen in the past few quarters. I mean I think we've commented that consumables has been performing well. We're seeing incremental strength in the general merchandise category. And when it comes to seasonal products, I mean, if you look at the past few quarters, it's anywhere between slightly negative, flat, slightly positive year-over-year. This quarter, summer seasonal sales performed well in positive territory. That's an indication a little bit more to the discretionary side. But it's the same trend that we've been seeing, I would say, exiting the pandemic and in the past few quarters.

Our next question is from Tamy Chen with BMO.

I wanted to ask on Australia. The operating expenses or SG&A this quarter, similar to Q1, how do we think about the -- those incremental integration costs? Like should they be rolling through now and thus, we should expect an uptick in the SG&A there? And Patrick, how do you guys think about overall the trajectory of the operating losses at Australia? Like what's the key gating factor to flip to profit? Is it just continuing to get those packaging product approvals and then you'll just kind of have this wave of Dollarama products building that density in the shelf?

Yes. Thanks, Tamy. So when it comes to the integration costs, the way to think about it is that they will be more heavily weighted through the second half. And the reason for that is there's an acceleration from the first half of introduction of products into the stores. I think notably of the seasons that are coming, there will be quite a bit of transition in the merchandise. We're ramping up and following the plan, but more costs to be expected in the second half. So when you think about the overall operating losses for the year, you would notice that at midyear point, we're about at a loss of $25 million. And so that would imply a certain acceleration in the third quarter. Recall that the third quarter is a seasonally weak period in Australia. So keep that in mind as you model the remainder of the year. And generally, the fourth quarter seasonally as well is a stronger period. I mean to your question about whether factors turning to profitability, I mean, it comes back to executing on our plan on 3 points, right? It's on the merchandising front of transitioning to dollar SKUs. It's about converting the stores, which we made great progress during the quarter. It's densifying the store count, making sure that we have great density and great product in the stores. It's working on the second and third levers on everything that is systems, logistics, back office and making sure that the real estate front follows the growth. So it's a combination of all those factors that we've laid out on Page 25 that will lead the business to a better financial outlook.

Our next question is from Vishal Shreedhar with National Bank.

Can you give us perspective on Mexico, a big acceleration there and how you feel about the reception? And maybe you can also give us a thought process, if you can, and as to why you feel so confident about Australia and if you're seeing any similarities between when you ramped up the other countries in LatAm or in Mexico that's giving you confidence in Australia that will ultimately become a profitable strong business?

So it's a two-pronged question. So if I start with Mexico, look, the -- I would say we're pleased with the ramp-up that we're seeing in Mexico. You're correctly to point out that we went from 11 stores to 21 in the space of 1 quarter, and we're continuing to ramp that up. I mean the reception of the Mexican consumer, I mean, it's the same comments as last quarter. I mean we're pleased with what we're seeing, and it gives the confidence that we should be ramping up the store network, and we're doing exactly that. We're accelerating the pace. Now how do we get comfortable with that is we've opened, like this is arguably the fifth country that we're opening. So we have a pretty good pattern and road map of how things play out. And as long as the rollout in Mexico is consistent with what the team has done 4 times in a row, gives us comfort that we're on the right path. Look, when it comes to Australia, I mean, nothing more to add than we've analyzed the market very well, and we think there's an opportunity there. There's a place for Dollarama for a value retailer, a convenient retailer. And nothing has changed since we've acquired the business. It's been a year as we've rolled out our integration plan. None of that vision has changed. And the ultimate goal remains the same, which is building the leading value retailer in the Australian market.

Our next question is from Mark Carden of UBS.

So to start, you talked about anticipating higher freight costs for the balance of the year. Just wanted to clarify there. Is that purely related to the lag, does it also build in oil prices remaining higher for an extended period of time versus the near-term resolution? And just how should we think about how changes in that front could impact your guidance?